Missteps marked KPMG insider-trading scandal

LOS ANGELES — It’s the kind of audacious but small-stakes insider trading that normally wouldn’t have merited much attention.

Golfing buddies Scott London and Bryan Shaw netted just $1.3 million, a blip in a world where Wall Street kingpins pocket hundreds of millions in ill-gotten gains.

The two men made one misstep after another. Their haplessness virtually guaranteed they’d get nailed, experts said. The scope of their ill-fated caper was made clear April 11, when federal prosecutors in Los Angeles filed a criminal charge against London, alleging that he passed insider tips to Shaw from 2010 to 2013.

London, a former auditor at KPMG, and Shaw, a jeweler in Los Angeles’ San Fernando Valley, kept trading even after Fidelity Investments suspended Shaw’s brokerage account, according to the Justice Department complaint. They swapped packets of cash in public. London predicted authorities weren’t interested in “small fish” like them.

Their most glaring blunder was the decision to trade shares of Herbalife, a Los Angeles company that was under intense scrutiny by federal authorities. The pals brushed aside the heightened risk in Herbalife and privately bemoaned that they missed out on bigger profits by not trading more frequently, according to the criminal complaint.

There were enormous stakes involved in the link to nutritional supplements maker Herbalife. The New York Stock Exchange was forced to halt trading of its shares for two hours after KPMG resigned as Herbalife’s outside auditor because of the emerging trading scandal. The halt was intended to prevent panicked traders from dumping the stock out of fear that Herbalife was about to release damaging news.

“You got two knuckleheads who keep affirming each other’s stupid ideas,” said Gene Murphy, a white-collar defense attorney at Murphy & Hourihane in Chicago. They kept at their scheme “even when warning flags are going up (and) the hairs are rising on the back of the neck.”

Even Shaw’s attorney, Nathan Hochman, conceded the fatal flaw: “It was probably less greed than stupidity.”

Tips and gifts

London fed Shaw confidential tidbits on Herbalife and footwear maker Skechers, two companies whose audits he oversaw in his high-ranking job as head auditor at KPMG’s Los Angeles office, according to the complaint. He also leaked information on other KPMG clients.

Shaw rewarded London with tens of thousands in cash, often slipping him manila envelopes stuffed with $100 bills during clandestine meetings on a side street near Shaw’s business, according to the complaint.

Shaw also gave London a Rolex Cosmograph Daytona watch worth $12,000, jewelry for his wife and Bruce Springsteen concert tickets.

London’s lawyer labeled some of those accusations “completely bogus.”

London publicly admitted wrongdoing in an interview with the Los Angeles Times, saying that he gave bare-bones information to Shaw after his friend’s business had suffered financial trouble. The mea culpa appeared to be part of a calibrated strategy to lighten the personal and legal backlash against the Agoura Hills man who had been involved in a variety of civic activities.

But the Justice Department and Securities and Exchange Commission (SEC) portrayed London as far more involved in the scheme than he had acknowledged, including advising Shaw how to structure trades to conceal their activity.

London plans to plead guilty May 17 and “hopes he will be spared prison time,” said his lawyer, Harland Braun. Shaw’s lawyer said he also expects charges to be filed against his client.

A bad target

The federal charge of conspiracy to commit securities fraud through insider trading carries a statutory maximum penalty of five years in prison and a fine of $250,000, or twice the gross gain or loss from the offense.

Shaw made $450,000 in Herbalife at one point and the men salivated at the notion that they could make even more, according to the complaint.

In one call, London referred to rumors that Herbalife may be going private, telling Shaw “(t)hat is going to be where you make a ton of money.”

What London, 50, and Shaw, 52, never accounted for was the financial and media firestorm that would ensue from any news pertaining to Herbalife.

Herbalife is caught in a bitter tug of war between two of the most prominent hedge-fund managers on Wall Street over the legitimacy of the company’s accounting and business practices.

Disclosure of London and Shaw’s scheme began to emerge when KPMG said it had fired a high-ranking employee, later revealed to be London, because of inappropriate trading in companies whose audits he handled.

The next day, Herbalife and Skechers said KPMG abruptly resigned as their outside auditor because of the suspected misconduct.

The NYSE halted trading in Herbalife shares to give jittery investors time to assess what was really going on. The resignation of an outside auditor normally is jarring news that signals potential accounting fraud — and investors were relieved when that wasn’t the case.

“Given the scrutiny that was already being placed on Herbalife, it’s almost like they wanted to get caught,” said Mark Fickes, a partner at law firm BraunHagey & Borden in San Francisco.

Friends no more

It’s a bitter end for two friends whose families had grown especially close.

London frequently commented on the Facebook page of Shaw’s wife, Cyndi. In 2009, Cyndi posted a photo of her with Scott London’s wife, Michele, and a third friend at a restaurant and captioned it “The 3 amigas.” The girls’ night out picture elicited a teasing response from Scott London, who commented, “You guys look a little out of focus. Is the world blurry to you?”

That same month, underneath a photo showing the Shaws smiling on vacation, London wrote, “Who is that hotty in the sunglasses.” Cyndi Shaw responded, “Your buddy Bryan of course!”

Other photos on Cyndi Shaw’s Facebook page show the couple, who live in Lake Sherwood, enjoyed a comfortable lifestyle with their two children, jetting around the world for Mediterranean cruises and vacations to Italy and Argentina.

But now that London and Shaw have been caught, they are no longer on speaking terms, said Braun, London’s lawyer.